Collapse of Innovative Spinal Technologies was Years In the Making, Sources Say; CEO Responds

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[Updated, see below.–WR] Our storieslast week about the shutdown of Innovative Spinal Technologies, a Mansfield, MA, company that raised $75 million in private funding to market devices for stabilizing injured spines, prompted a number of IST’s former employees and business associates to contact Xconomy to help flesh out the details of the company’s demise more fully. A picture is now emerging of an organization hobbled by management decisions that distanced it from its founding scientists in Texas, impaired its ability to sell its products to surgeons and hospitals, and exhausted its capital too quickly before it could get traction with enough sales of its spinal devices.

In particular, several sources I interviewed blame the company’s failure on IST president and CEO Scott Schorer. He’s a 40-year-old serial entrepreneur, real estate developer, and former Army Ranger who joined IST in 2002 when it was spun off by the Texas Back Institute under the name MusculoSkeletal Research Corporation. It was Schorer who transformed the company from a research incubator into a standalone medical device manufacturer, and Schorer who single-handedly raised the company’s crucial $39 million Series B venture funding round in 2005, sources agree. But the same person ultimately “drove this plane into the ground,” says Stephen Hochschuler, a spine surgeon who co-founded the Texas Back Institute and was a member of IST’s board until 2006.

IST “would make a great Harvard Business School case study of what not to do at a startup,” Hochschuler says.

As we’ve already reported, IST used much of its venture money to relocate to facilities in Massachusetts and to hire more staff, eventually growing to more than 100 employees. But disappointing sales of the company’s pedicle-screw system—marketed as a minimally invasive way to fuse or stabilize spinal segments in patients with damaged intervertebral discs—evidently meant it couldn’t sustain itself at that size. It shed staff drastically in 2008, shrinking to no more than 10 employees before finally closing its doors on January 23.

Executives tried to avert a shutdown by selling the company, and were close to a deal with Biomet Spine, a subsidiary of Warsaw, IN-based Biomet, according to one source I spoke with last week. But Biomet backed off in the end, the source says.

And now, according to a confidential IST memo shared by one source, IST is requiring customers to return all implants and surgical equipment to the company.* The memo from IST vice president of quality assurance Brian Callahan, issued January 23 (the day the company closed down), says all IST customers must immediately send back their inventory while the company works through “strategic and financial issues” and seeks a “different corporate partner” to sell the technology. Because the equipment is no longer supported by the company, the memo continues, anybody who uses it could be liable for civil and criminal penalties. It’s not known how many of IST’s devices were implanted in patients. [*Updated, 8:00 pm, 2/3/09: The first two sentences of this paragraph were edited for clarification.]

I reached Schorer by phone today, asking him about the state of affairs at IST and soliciting his responses to the criticisms lodged by former employees and associates. Contrary to an assertion from one source quoted in my January 27 story, the company has not filed for bankruptcy protection, Schorer says. “We hope to avoid that,” he says. “Obviously we’re trying to sell assets in order to take care of our liabilities and obligations to all of our constituents—the creditors, the shareholders, and the employees.”

Schorer said that as long as these negotiations were going on, he will not be able to respond in detail to questions or criticisms about the path the company has taken. “I’m happy when we are done with the process to come back and talk about what happened,” he says. “I just don’t want that to interfere with the process or cause issues for the process.”

“We have nothing to hide here,” Schorer continues. “I’m fine after we’re done with all of this for the truth to come out about what happened here, and shed a more credible and balanced light on what happened, as much as I can.”

If the criticisms of Schorer’s decisions were coming from a single source, it might be easy to write them off as the opinions of a disgruntled former employee. But a great many people seem to be disgruntled about IST’s fate. And the twists and turns in that story seem to merit further exploration, considering how much praise the company won for its early engineering efforts and how much money it eventually burned through before shutting down.

Hochschuler and other surgeons at the Texas Back Institute hatched MusculoSkeletal Research in 2002 with the idea of earning a financial return on the extensive research going on inside the institute. “Initially we kind of gave all our technology away through our non-profit research foundation,” Hochschuler says. “But after a while we said, ‘this is crazy—we have so many ideas, and we’re so connected in the spine world, why don’t we do something for-profit that would still help the community.’ ”

Hochschuler says Schorer, who had scored a big success by selling his previous company, a medical device shopping site called CentriMed, to Global Healthcare Exchange in 2000, approached TBI together with an associated named Fred Moll about investing in MusculoSkeletal Research. At that time, the organization was funded by investments from big medical-device companies such as GE Healthcare. Says Hochschuler, “I met with them and I liked them and I said, ‘We’re not taking any individual investments, but Scott, if you will become the CEO, I’ll let you guys invest.”

Schorer accepted the post, and the company was soon renamed Innovative Spinal Technologies. In 2003 the company raised a $6.2 million Series A funding round that included investments from device companies ANS, Orthofix, Synthes, and GE. But the company’s big break came two years later, when … Next Page »